-Caveat Lector-
JOHN WILLIAMS' BEHIND THE GOVERNMENT NUMBERS Issue Number One
November 16, 2004
Welcome to the premiere edition of Behind the Government's Numbers. This monthly newsletter will address and assess the reporting of key U.S. economic series as to accuracy and meaningfulness, and will offer alternative measures when they are available.
If you have not already read my original five-part series, written under the umbrella title, "Government Economic Reports: Things You've Suspected but Were Afraid to Ask!" (available on the Home Page in the "A Primer on Government Economic Reports" section), I urge you to read at least the "Series Master Introduction", which serves as a general background to the material that follows.
Content of the newsletter will evolve to meet the needs and interests of our subscribers, so please let us know of any series or issues you would like to see covered or content you would like to have included -- Contact Us. Special thanks go to Doug Gillespie and Mark Readdie of Gillespie Research Associates for making this research affiliation possible. Thank you for your ongoing support and interest. -- John Williams
_____
STAGFLATION OR WORSE SIGNALED BY KEY INDICATORS
PAYROLLS BOOSTED BY UNUSUAL SEASONAL ADJUSTMENTS
While the financial markets feasted on a report of strong payroll growth that resulted from some seasonal factor indigestion, key leading indicators, of good quality, combined to send a signal of possible pending stagflation.
Where many business series covered in this month's newsletter are showing slowing annual growth, Help Wanted Advertising and the Purchasing Managers Survey's New Orders component turned negative on an annual basis. Combined with surging oil prices and the PMS's Prices Paid component, signals for a period of stagflation, or worse, are in place.
Due to continued financial market misperceptions of solid economic growth and contained inflation, the broad reporting risk to upcoming economic numbers continues to weigh in favor of indicators of economic growth coming in below, and indicators of inflationary pressures coming in above, market expectations. Where our analysis offers particular insight into likely reporting biases in the next releases of key series, such is noted in the text accompanying the specific series analysis.
This month's "Reporting Focus" is on consumer confidence, a concept surveyed and modeled only in the private sector. Methodological problems and survey biases are not limited to government numbers.
THE BIG THREE MARKET MOVERS
(Each of these is explored in the "Government Economic Reports..." series that is referenced earlier.)
Employment/Unemployment -- The popularly followed October 2004 unemployment rate U-3 rose from 5.4% to 5.5%, seasonally adjusted, within the published +/- 0.2% margin of error of the household survey. The broader U-6 measure, also seasonally adjusted, rose from 9.4% to 9.7%, a statistically significant increase. Including the long-term "discouraged workers" defined away during the Clinton administration, total unemployment is roughly 12.7%.
Despite the rise in unemployment, the payroll survey showed a seasonally adjusted surge of 337,000 jobs, 450,000 net of revisions. The tip-off to unusual reporting activity by the Bureau of Labor Statistics is in the prior-period revisions.
Aside from the strong October growth, the seasonally adjusted level of nonfarm payrolls was revised upward by 70,000 in August and by 113,000 in September, but the unadjusted revisions were just -3,000 and +23,000, respectively. Nearly all the changes were in the seasonal adjustments, not in revised jobs data.
Starting this year, the BLS began calculating the monthly seasonal factors on a monthly basis. This has resulted in the BLS being able to report almost anything it wants to in any given month. Where, over the period of a year, the seasonal factors should, in theory, balance out, such does not necessarily work under the new system.
Next Release (December 3): Odds favor a weaker-than-expected gain in payroll employment. The seasonal adjustment factors should face some catch-up and the monthly bias factor is scheduled to be small.
Gross Domestic Product (GDP) -- The "advance" estimate of third-quarter 2004 annualized real GDP growth was 3.7%, about average, up from 3.3% in the second quarter. Year-to-year growth, however, slowed from 4.8% to 3.9%. As discussed in the background articles, current reporting is overstated by about 3%, which would place actual annualized growth at roughly 0.7% plus or minus roughly 3%, given the published confidence intervals.
The advance estimate published by the Bureau of Economic Analysis is largely a guesstimate, and the BEA tries to move its estimate towards the consensus forecasts.
Next Release "Preliminary" Estimate (November 30): Since the consensus forecasts were looking for a stronger a number than was published with the advance estimate, and the reported number likely was boosted toward that consensus by the BEA, odds favor a revision away from the consensus, or a downward revision in the next report.
Consumer Price Index (CPI) -- The seasonally adjusted 0.2% (also 0.2% unadjusted) monthly gain in the September CPI-U, with year-to-year inflation at 2.5%, was far short of reality.
Using the CPI's original (pre-Clinton Era) methodological approach of a fixed basket of goods (vs. substitution of hamburgers for steak as estimated by geometric weighting) would leave year-to-year inflation at 5.2% instead of 2.5%.
The "experimental" Chained Consumer Price Index (C-CPI-U), the CPI of the future, which is fully substitution-based, showed only a 2.1% year-to-year gain.
Next Release (November 17): The markets are expecting some catch-up in energy price reporting with a surge in monthly CPI-U reporting of perhaps 0.4% for October. A greater gain is favored by recent depressed reporting, with year-to-year inflation likely to jump to 3.0% (5.7% adjusted to the old methodology) or higher, now that the annual social security cost-of-living-adjustment has been set and the election is over. (See Addendum and note below for October results.)
Please Note: This premiere newsletter was written November 16, 2005, the day before the release of the October CPI, Building Permits and Industrial Production. These reporting results are addressed in the Addendum found at the conclusion of the text. The normal publication schedule, docketed to commence on December 8, 2004, generally will be the Wednesday following the release on the employment report (usually the first Friday of the month), well in advance of the numerous mid-month economic releases.
OTHER TROUBLED KEY SERIES
To varying degrees, the following series have significant reporting problems. Each series will be addressed in a monthly Reporting Focus, with Consumer Confidence addressed this month. The Federal Deficit was covered in the initial background articles. This section will be expanded over time.
Federal Deficit -- The official deficit for fiscal year ended September 30, 2004 was $412.3 billion, up from $377.1 billion the year before. For the twelve months ended October, the rolling deficit was $400.0 billion. Gross federal debt as of the end of September was $7.379 trillion, up $596 billion from a year earlier; debt at the end of October was $7.430 trillion, up $557 billion. The current gross debt level is close to technical default, with the debt ceiling at $7.4 trillion.
The current numbers are being constrained by the U.S. Treasury using accounting gimmicks and loopholes to keep the debt level below the ceiling. Watch for both the monthly deficit results and debt level to jump as soon as Congress raises the debt ceiling.
GAAP-based reporting still is likely to show an annual shortfall of $800 billion for fiscal 2004, net of Social Security and Medicare accounting, $4.3 trillion including Social Security and Medicare, as discussed in the background articles.
Producer Price Index (PPI) -- The seasonally adjusted October Finished Goods PPI jump of 1.7% (2.2% unadjusted) reflected catch-up reporting on energy prices. Year-to-year PPI inflation rose to 4.4% in October, up from 3.3% in September.
Retail Sales -- The monthly gain in October retail sales was 0.2% +/-0.8%, up a strong 7.6% from October 2003. Inflation-adjusted growth in retail sales below 1.8% (using the standard CPI for the deflator) signals recession. Annual growth is closing in on that level.
Industrial Production -- The Federal Reserve's Index of Industrial Production is of fair quality as a coincident indicator. Unusual weather patterns that distort the index often throw off utility usage, which is used to estimate such things as computer production, as well as being counted in its own right. Seasonally adjusted Industrial Production rose 0.2% in September (0.1% net of revisions) and was up 4.4% year-to-year. While annual growth has been slowing since mid-year, it still is strong, as reported. October data will be published tomorrow. See the Addendum appearing later.
New Orders for Durable Goods -- This series used to be one of the better leading indicators of broad economic activity, when smoothed using a three-month moving average. Then the semi-conductor industry stopped reporting new orders, and the series' quality fell apart. September seasonally adjusted orders were up 0.2% from August, which was down 0.6% from July. Year-to-year growth is a strong 7.4%, but softening.
Trade Balance -- The September trade deficit in goods and services narrowed to $51.6 billion from August's revised $53.5 billion (previously $54.0 billion), leaving the third-quarter deficit 3.6% wider than the second quarter's and 7.3% worse than third-quarter 2003. Continued sharp deterioration is likely. Specifics will be covered in next month's Reporting Focus along with details of a number of the series' methodological and revision peculiarities.
Consumer Confidence -- Both the Consumer Confidence and Consumer Sentiment surveys in October showed sharp monthly downturns, 2.7% and 4.0% respectively, and slowing annual growth, suggestive of some slowing of the economy in second- and third-quarter 2004. These series are lagging, not leading, indicators, as discussed in this month's Reporting Focus.
BETTER-QUALITY NUMBERS
The following numbers are generally good-quality leading indicators of economic activity and inflation that offer an alternative to the politically hyped numbers when the economy really is not so perfect. In some instances, using a three-month moving average improves the quality of the economic signal and is so noted in the text. This section will be expanded over time.
Economic Indicators
Purchasing Managers Survey - New Orders -- Published by the Institute for Supply Management (ISM), the New Orders component of the Purchasing Managers Survey is a particularly valuable indicator of economic activity. The index is a diffusion index, where a reading above 50 indicates rising new orders, with an October reading of 58.3. Nonetheless, on a three-month moving average basis, the New Orders Index level was down 3.5% month-to-month in October, with year-to-year change dropping from 1.9% in September to -4.5% in October. This signals that the economic pick-up shown by the series at mid-year 2004 has or is about to turn down.
Help Wanted Advertising Index (HWA) -- Published by the Conference Board, the HWA is a reliable leading indicator of employment activity. In September, it fell to 36, from 37 in August, hitting its lowest level in 43 years. Year-to-year change in the three-month moving average has been negative now for two months, signaling a reversal of the improvement it was showing in the first half of 2004.
Building Permits -- Fed by a low-rate funding frenzy, the housing industry has remained strong throughout the economic and financial disruptions of the last several years. Building permits, smoothed with a three-month moving average, is a reliable leading indicator to the housing industry and the broad economy. Year-to-year growth has been slowing, recently, with September's 4.2% annual increase the softest in more than two years. Such suggests some slowing in economic growth, but not a downturn, yet. The October numbers are due out tomorrow. See the Addendum appearing later.
Inflation Indicators
Purchasing Managers Survey - Prices Paid -- Published by the Institute for Supply Management (ISM), the Prices Paid component of the Purchasing Managers Survey is a reliable leading indicator of inflation activity. The prices paid index is a diffusion index, where a reading above 50 indicates rising inflation, with an October reading of 78.5. The index has been signaling a strong rise in inflation since late in 2003. On a three-month moving average basis, the Prices Paid Index level rose 0.6% month-to-month in October, with the year-to-year gain easing from 44.8% in September to a still-solid 40.9% in October.
Oil Prices -- Oil price changes permeate costs throughout the economy, ranging from transportation and energy costs, to material costs in the plastics, pharmaceutical, fertilizer, chemical industries, etc. West Texas Intermediate Spot rose 15.7% for October, up 75.2% year-to-year. While oil prices since have eased some, broad inflation costs still will rise more than the inflation-net-of-food-and-energy crowd would like to think.
U.S. Dollar -- The Federal Reserve's Major Currencies (U.S.) Dollar Index can be used as a surrogate for the greenback's global performance. Generally, the weaker the dollar, the greater will be the ultimate inflation pressure. October's dollar average was down 2.3% from September and down 5.1% from October 2003. November already has experienced an additional 3.7% drop in the dollar.
NOVEMBER'S "REPORTING FOCUS" -- CONSUMER CONFIDENCE MEASURES FINANCIAL MEDIA SENTIMENT
The markets generally follow two measures of consumer confidence the Consumer Confidence Index as published monthly by the Conference Board and the Consumer Sentiment Index as published twice a month by the University of Michigan's Institute for Social Research. Where the Confidence and Sentiment series date back to the 1960s and 1950s, ABC News publishes a weekly Consumer Comfort Index, which dates from the 1990s and is not widely followed. A history that covers multiple business cycles is useful in establishing the relationship of a given index to other economic series.
While the two major indices have significant quality issues, many of the problems can be overcome by viewing the data in terms of the year-to-year change in a three-month moving average. On that basis, the series are useful as lagging indicators, signaling where the economy has been in recent months, not as the leading indicators hyped in the financial media. Lagging indicators are useful, particularly considering that the economic consensus can be three to four quarters or more behind recognizing shifts in economic activity.
A major problem facing both indices is that consumers are, in effect, asked to be economists, to assess how the economy will be performing at some time in the future. Since most consumers are not economists, they tend to parrot what they hear and read in the financial media. In the 1990s, Geoffrey Chow of the University of Minnesota published the Media Climate Index, which measured the relative positive or negative tone of newspaper stories on the economy, as published around the country. His index served as a highly correlated leading indicator of the Consumer Confidence and Sentiment Indices.
The Conference Board's Consumer Confidence purportedly is based on a survey of 5,000 consumers per month. While 5,000 post cards are mailed out, reportedly to paid participants, typically about 3,500 cards are returned. What is extraordinarily questionable about the series is that it is "seasonally adjusted," but the unadjusted series is never made available. The Conference Board's purpose is to promote business, and it is not unusual to see regular reporting of heavily positive Consumer Confidence numbers at the onset of the holiday shopping season.
Al Sindlinger, who published his own consumer confidence measure for nearly fifty years--until his death in 2000--ran the initial survey for the Conference Board. Al always chuckled when he described the early efforts. It seems that when he reported positive results to the Conference Board, he'd hear the details an hour later on the radio. When the results were negative, he'd always get a call asking him to recheck his results.
The issues with the University of Michigan's Consumer Sentiment Survey include sampling problems. The telephone survey of 500 consumers each month is too small to have tight statistical significance. Even worse, the early-month results usually are based on something less than half that amount, and are virtually worthless in terms of having meaningful statistical significance. Sampling problems are compounded by the increasing use of voice mail and cell phones, where certain consumers never are surveyed.
Beyond suspicions that reporting of Consumer Sentiment occasionally has been massaged as a favor to Alan Greenspan, there also is the questionable use of the series as a market-trading tool. Subscribers pay heavily to get the first release of the data. Once they've taken their market positions, they "leak" the data to the press, and the markets respond. The University of Michigan does not release the data to the public until well after the insiders work their trading games.
DECEMBER'S SCHEDULED "REPORTING FOCUS" -- TRADE BALANCE IN GOODS AND SERVICES
The goods data are reasonably sound, but the services data are guesstimated, and recently introduced "smoothing" techniques have been used to remove the impact of the 9/11 terrorist attacks.
ADDENDUM (Covering economic releases of November 17, 2004)
The economic releases of November 17 showed further signs of a slowing economy and mounting inflation pressures in addition to a strong industrial production report.
Consumer Price Index (CPI) -- After gaining just 0.2% in September, the seasonally-adjusted CPI-U rose 0.6% (0.5% unadjusted) reflecting some reporting catch-up. October's year-to-year inflation jumped to 3.2% from 2.5% in September, which remains far short of reality. Restated to the original CPI concept and pre-Clinton Era methodology, October's annual inflation was about 5.9%.
The Chained Consumer Price (C-CPI-U), the latest revision in CPI methodology that presumably is the eventual replacement for current CPI reporting, showed annual growth of 2.7% in October, up from September's 2.1%. Interestingly, however, the C-CPI-U did not have its regular highlighting in this morning's release.
Next Report (December 17): While inflation pressures will continue to offer upside surprises in many reports, given the reporting catch-up and usual year-end patterns, look for the next report to come in close to or a little below market expectations.
Building Permits -- Seasonally adjusted October building permits fell 0.7% from September (down 1.0% net of revisions), with year-to-year change down by 1.5%. On a three-month moving average basis, annual growth dropped from September's 4.0% to 0.5%, the lowest level since November 2001. As a leading indicator of economic activity, the series is showing a meaningful slowdown.
Industrial Production -- Helped by utility usage, October industrial production rose 0.7% (0.8% net of revisions) with year-to-year growth bumping up from a revised 4.5% in September to 5.2%. The series has some problems that will be detailed in a future newsletter. As a coincident indicator with the economy, it suggests ongoing growth in the manufacturing sector, reasonably consistent with the still positive but slowing readings out of the overall purchasing managers survey.
________
www.ctrl.org DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance—not soap-boxing—please! These are sordid matters and 'conspiracy theory'—with its many half-truths, mis- directions and outright frauds—is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRLgives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credence to Holocaust denial and nazi's need not apply.
Let us please be civil and as always, Caveat Lector. ======================================================================== Archives Available at:
http://www.mail-archive.com/[email protected]/ <A HREF="http://www.mail-archive.com/[email protected]/";>ctrl</A> ======================================================================== To subscribe to Conspiracy Theory Research List[CTRL] send email: SUBSCRIBE CTRL [to:] [EMAIL PROTECTED]
To UNsubscribe to Conspiracy Theory Research List[CTRL] send email: SIGNOFF CTRL [to:] [EMAIL PROTECTED]
Om
